Getting a divorce can be a painful experience and the tax treatment of children is often overlooked. The following tips, when used correctly, can save money and time.
The Tax Exemption
For each exemption you list on your tax return, you may deduct $3,500 from your adjusted gross income, lowering the taxes that you owe to the IRS. You may always claim an exemption for yourself (a personal exemption), and when you have children you are often entitled to claim exemptions for them (dependent exemptions). The children must be under the age of 19 at the end of the year, or 24 if full-time students, or permanently and totally disabled.
In most situations, the parent who has physical custody of the child is allowed to claim the child as a dependent exemption. If your divorce decree is silent about the dependent exemption, then it remains with the custodial parent. However, you can negotiate with your spouse as to who will claim the children as exemptions. If you agree that the non-custodial spouse will be allowed to claim the dependent exemption, you must sign a Form 8332 and the non-custodial spouse must attach the form to his or her tax return. You can negotiate the dependent exemption for each particular year, or release it forever. But the Form 8332 must be attached to the non-custodial spouse’s return each year if he or she is claiming the exemption.
Don’t waste the tax exemption. Quite simply, if you have no income, there can be no deduction and no tax benefit for you from the dependent exemption. If this is your situation, it makes sense to sign over the dependent exemption to your ex-spouse and negotiate for some other financial benefit.
After you are divorced, you may choose to file a tax return using either the filing status single or head of household. If you use head of household, you have a lower tax rate and a higher standard deduction and pay less in income taxes. There are specific rules that entitle you to use head of household filing status. Generally, to be head of household, you must be unmarried at the end of the year, you must have paid more than half the cost of keeping up the home for the year, and a “qualifying person” must have lived with you for more than half the year.
If you are the custodial parent, you are entitled to use head of household filing status, even if you allow your ex-spouse to use the child for a dependent exemption.
The basic rule is that the person who pays alimony is entitled to deduct the amount paid on his or her return and the person who receives alimony must include the amount received on his or her return as income.
Payments made to your ex-spouse that are for your ex-spouse are alimony. Alimony payments must be made in cash and must be made pursuant to a court order or divorce or maintenance decree. Payments made to third parties on behalf of your ex-spouse may be considered alimony, such as rent, health insurance, and medical payments. The payments cannot be voluntary. You and your ex-spouse cannot live in the same home while the payments are being made. The payments must terminate upon the death of the person receiving the alimony payments.
The basic rule is that child support payments are non-taxable events. Thus, the person making child support payments is not allowed to deduct the amount paid on his or her tax return, and the person receiving child support does not need to include the amount received on his or her tax return.
The Child Tax Credit
The child tax credit reduces your taxable income by $1,000 per child. The child must be under the age of 17 at the end of the year and must have a Social Security number or Individual Taxpayer Identification Number (ITIN). To be able to claim the child tax credit, the child generally must live with the parent for more than half the year. In the case of divorced parents, because of the six-month requirement, the custodial spouse usually claims the credit. However, if the custodial spouse signs the Form 8332 releasing the dependent exemption, the non-custodial spouse has the right to claim the child tax credit.
The Earned Income Tax Credit (EITC)
Eligible taxpayers may claim a credit equal to a specified percentage of the taxpayer’s earned income. We will not explain how to calculate this earned income tax credit (EITC) in this article. Listed below is important information about the credit for taxpayers who are divorced or separated:
- The number of qualifying children a taxpayer has plays a role in applying the credit percentage and the earned income amounts used to determine the credit.
- For purposes of determining whether a child is a “qualifying child,” the same definition of a qualifying child for purposes of the dependent exemption applies for purposes of the EITC, except that the requirement that a child not provide more than one-half of his or her own support does not apply.
- A dependent exemption release does not apply to the earned income credit, so the custodial parent’s release of the dependent exemption for a child does not entitle the non-custodial parent to take that child into account when calculating the EITC.
If you are divorced, the parent with whom the child lived for more than half the year is entitled to file for the EITC, regardless of which parent claims the child for the dependent exemption. If both parents lived with the child for more than six months, either parent could claim the EITC, and the parents should decide which one will. However, if each parent separately claims the child for the EITC, the IRS will determine which parent lived the longest with the child and will deny the claim filed by the other parent. If the child lived with both parents for the same amount of time during the year, then the parent with the highest adjusted gross income is entitled to the EITC.
The Child and Dependent Care Credit
If you paid someone to care for your dependent child under age 13 or your disabled dependent or spouse so that you could work or look for work, you may be able to claim the child and dependent care credit on your tax return.
To qualify for the child and dependent care credit, you must:
- Have paid for care expenses in order to earn taxable income;
- Pay more than 50% of the household maintenance costs for a qualifying dependent;
- Hire someone other than your child (under age 19 at the end of the tax year), your spouse, or a person you can claim as a dependent;
- Have qualifying expenses over and above any tax-free reimbursements from your employer; and
- Report on your tax return the name, address, and taxpayer identification number of the child care provider. If the care provider is a tax-exempt organization, the taxpayer identification number is not required.
Employment-related expenses that qualify for the child and dependent care credit include household services and expenses for care of the child. Expenses of attending a daytime summer camp qualify for the child and dependent care credit if that is a reasonable means of providing care during working hours. However, overnight camp expenses do not qualify for the child and dependent care credit. A nursery school generally qualifies for the child and dependent care credit, though an elementary school does not qualify.
Child and dependent care credits are allowed for $3,000 of expenses for one dependent’s care and $6,000 for more than one dependent’s care.
If you are the custodial parent, you may claim the child and dependent care credit for the child even if you can’t claim the child’s exemption. If you are the non-custodial parent, you may not claim the child and dependent care credit even if you can claim the child’s exemption.
This article appeared in the June 2009 issue of Looking Out for Your Legal Rights®.
This information last reviewed 11/2/11.